Sun Communities Inc (SUI) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Sun Communities' First Quarter 2004 Earnings Result Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press "*" "0" on your telephone keypad. As a reminder, this conference is being recorded.

At this time, management would like me to inform you that certain statements made during this conference call, which are not historical facts, may be deemed forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Although the company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the company can provide no assurance that its expectations will be achieved. Factors and risks that could actual results to differ materially from expectations are detailed in this morning's press release and from time to time in the company's periodic filings with the SEC. The company undertakes no obligation to advise or update any forward-looking statements to reflect events or circumstances after the date of this release.

Having said that, I would like to introduce management with us today: Mr. Gary Shiffman, Chairman and Chief Executive Officer of Sun Communities Incorporated, and Mr. Jeff Jorissen, Chief Financial Officer of Sun Communities Incorporated. Thank you, gentlemen. You may begin.

Good morning. First quarter earnings, as announced prior to the opening of the market today, were funds from operations of 17 million, or 80 cents per share, compared to 18.8 million, or 92 cents per share, in 2003. Net income for the first quarter was 5.6 million, or 30 cents per share, compared to 6.3 million, or 35 cents per share, in the prior year. And revenues for the first quarter were 49.8 million compared to 47.9 million in the first quarter of '03.

Today, I'd like to start out by discussing the first-quarter portfolio performance and follow up by a further discussion of the company's current recap. In the first quarter, the portfolio reflected substantial improvement in virtually every measure. The same property portfolio of 108 communities is most representative really of those improvements to performance. Revenues increased by 3.9% while expenses increased by 0.9%, which resulted in net operating income increasing by 5%.

We leased 35 net manufactured housing sites in our development communities, while losing only 11 net sites in our entire stabilized communities for a net gain of 24 manufactured housing sites in the third quarter. This compared to a net loss of 92 sites in the first quarter of 2003 and a trend of increasing net occupancy losses for each of the subsequent quarters last year. The quarter one has ended that trend, and we continue to see improved demand, thus far, this month. Delinquencies declined to 1.1 million the lowest levels since April 2002 and a $435,000 improvement from 12/31/03. And within Sun's entire portfolio, the number of repossessed homes stood at 594 at quarter's end, which is the lowest level since September 2002.

These initial signs seem to reflect the beginning of a positive recovery, which we had anticipated for the second half of '04 in previously given guidance. We continue to expect the last significant wave of repos created by earlier four credit practices to work through this system that we purchased by stronger more creditworthy homeowners throughout the balance of the year. Manufacturers must also look to the end of the repo overhang coupled with a more available retail financing and their own operational adjustments to see a turnaround in their own industry.

And, now, I'd address the company's current recap. Sun has been an investment grade rated company since 1996 and was upgraded by both Moody's and S&P in 1999. And our decision to return to the ranks of secured debt bowers orders is driven by the low interest rate environment and the challenges to compete for the acquisitions with our unrated private and public competitors and management's strong desire to create additional earnings growth potential and value for our shareholders.

Our cost of capital has been approximately 8.5% assuming an acquisition of finance with 50% debt and equity at cost of 5% and 12%, respectively. This capital cost after the recap declines to 6.4% at the ratio of 80% and 20% equity. In fact, our cost of capital for the next $600 million to $700 million of acquisitions is likely to be lower than 6% due to the 5% fixed rate on our net proceeds after the recap. And if we examine the cost of capital implications a little bit more closely, we would find that a $200-million acquisition financed with equal amounts of debt and equity, which are required currently under current rating would have a cost of capital of about $17 million, again assuming 5% debt cost and 12% cost of equity. That same transaction financed with 80% debt and 20% equity has a cost of capital cost of $12.8 million, thereby, generating a $4.2-million benefit to the shareholder.

Growth prospects are also enhanced with a need to issue fewer shares under the lower cost alternatives. So why as a company have we done this now? With interest rates and spreads at 40-year historic lows. We were able to lock in 625 million of the expected $750 million of new borrowings at attractive rates prior to the recent jobs reported. When the new borrowings close over the next 30 days or so, we expect our weighted average interest rate to approximate 5% with an average duration of 10 years. That means we can profit from the historically attractive interest rate environment that we locked into in late March 2004 all the way through the year 2014.

It's a very expensive decision, which was not entered into lately. The prepayment and related cash costs are expected to approximate $53 million. When these costs are weighed against the interest savings on the newly issued debt, the result on a net present value basis approximates breakeven. So if this relates fully to the use of about 400 million of the up to $700 million of proceeds, when the remaining $350 million of proceeds are used to acquire property or retire preferred equity or repurchased stock, the cost benefit pendulum swings decisively into the benefit column creating significant accretion for the shareholder.

We believe that this increased leverage will be accomplished with our commensurate increase in risk. This is due to the innate stability, if you will, of our revenue stream, which has lately earned the description "recession resistant" for our asset class; and a look at the current record, I think, confirms this. Since 1998, the industry has experienced a devastating cyclical downturn in the shipments of new homes in a home financing environment characterized by poor liquidity and a diminished number of lenders, as we've discussed previously. In 2003, we lost just under 1,000 revenue-producing manufactured housing sites. Nearly, 95% of those sites were in 25% of our communities; the other 75% of our communities were approximately breakeven in occupancy for the year.

Focusing on our same property portfolio over that same cycle, we have lost 650 basis points of occupancy during the period from 1999 to 2003.Nevertheless, our same property revenues increased every year through this cycle by 6.3%, 5.2%, 5.4%, 4.7% and 2.4% respectively from '99 to 2003.

The stability of the revenue stream during one of the industry's worst cycles serves as witness to the signature resilience of the company's cash flows. Dividend policy and security are also very important to us. Our first quarter payout ratio based on FFO was 76% and increase to about 81% based on FFO adjusted for recurring CAPEX. We expect those percentages to decline as we put the net proceeds from the recap to work. And it is the Board's intent to continue to revisit the dividend each quarter as it is best developed throughout 2004.

At the end of the first quarter, the company was in various stages of negotiation with respect to the acquisition of approximately $360 million of properties. Including the Property Asset Management Inc. or PAMI properties, as previously disclosed in our February 19th 2004 press release. The company has entered into an agreement with certain affiliates of PAMI to acquire all of the equity interests and partnerships that directly and indirectly own and operate 19 properties, and entered into a purchase agreement to acquire seven other properties. PAMI, the seller under the purchase agreements, is the sole general partner and owns a substantial majority of the equity interest in the partnerships that own the properties subject to the purchase agreements.

PAMI has exercised its rights under the relevant partnership agreements to acquire the equity interest of its minority partner and has filed a suit to enforce its rights to purchase some minority interests. The trial was held in Delaware on April 15th and 16th, 2004, and a decision by the court is expected by June 30th 2004. PAMI believes that it will be successful in this litigation, and we expect to complete the acquisition of the partnership interest and properties. However, due to the uncertain nature of the litigation we can provide no assurance that we will be successful in completing this transaction and we cannot reliably predict the timing of the resolution of these matters or include any of those earnings in our earnings.

And at this time, both Jeff and I would be pleased to answer any questions.

Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. If you would like to ask a question, please press "*" "1" on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press "*" "2" if you would like to remove your question from the queue. For participants using speaker equipment it may be necessary to pick up your handset before pressing the "*" key. Once again that is "*" "1" to register any questions at this time.

Our first question is coming from Jordan Sadler of Smith Barney. Please proceed with your question.

Good morning. I just wanted to go back to the $53 million of pre-payments associated with the recap. Could you break -- give us a break down on those and maybe talk about the progress of the note tender?

Well, the 53 million is about $51 million -- its paid to retire the notes and about $1 million or $2 million of fees get it to and other expenses get it to the 53 million, and I don't think at this point we will want to add much more then to the press release that went out this morning on the tender, which indicates that we are considering a number of alternatives that's delineated in paragraph 2 of the press release, and we'll be making some determinations this afternoon with respect to which path we'll be taking.

OK. Do you know a majority of them have been tendered or you don't want to comment on that either?

I think the latter.

OK. Of that 51 million, I'm just curious is that a consent fee - I mean does that breakdown into consent fee or is that just fall or May call, 100% May call (ph)?

Two of the bond issues have May calls and two of them don't. So it is the best estimate of the pricing that is necessary to retire the bonds, the best estimate that we've received.

OK. And then I guess, just moving on to the Origin (ph) - I just wanted to, I know that you guys -- the Road Show is supposed to begin I understand, could you give us a little color or how it performed and where those numbers show up in your numbers during the first quarter?

Well, the number are in interest and other income, and because of where Origin is standing right now relative to potentially embarking on a Road Show and they have not issued their first quarter numbers or any comments on their operations, I think it would be inappropriate for us to make any such comments.

OK. And I guess, I'm looking at your interest and other income. So, -- could you say that it was -- I just heard that the equity and income line was flat this quarter. There was nothing in there. What was the reasoning behind that?

Well, the reasoning behind that is that if we had an equity and income of affiliates there is only a one affiliate and we would have thereby disclosed the income of Origin in our press release by showing it on that line item and after consultation with our Securities Counsel they said that they considered they would think that that would be inappropriate for us to be disclosing results that Origin has not disclosed, particularly given the state of Origin's intentions, currently.

So, what was the 667,000 that you've recognized in December of '03?

That was their fourth quarter -- our participation in their fourth quarter income.

OK. So, on a sequential basis the interest income lines are not really comparable, is that right?

Well on their comp, well, I mean if you're looking at.

I'm looking at your supplemental.

If you're looking at -- well, Q -- that's right you'd have to -- let me see OK. Well, they are comparable because the equity income is included in the -- oh I see. You're right you'd have to add the 667 to the 37. You'd have to collapse the equity line in the other income line.

OK.

Then you'd have comparability.

OK. Now, I think you guys have may be discussed this but I know that would be some additional discussion and filings as it relates to Origin, are you guys subject to the lockup for -- and if so for what period and could you talk about maybe Gary personally as well?

We're subject to both Sun and myself are subject to a 180-day lockup period.

OK. And what is your -- do you have any insight into the expected pricing on the ICL (ph) is there a range established yet?

I do not. I think that the group at Origin management team is studying very carefully the changes that have taken place in the marketplace over the last couple of weeks and the board has not, and they are moving forward for the best transaction in the interest of all the shareholders.

I guess, Adesa (ph) move on to Sun. Just I'd like a little bit more color on the 360 million of acquisitions you guys are pursuing from PAMI and probably a significant (inaudible).

Sure.

Is it two thirds of that total amount you think?

It is just under two thirds.

OK. And I know you don't really want to comment on that but what about the remainder, the 150 million?

The remainder -- are all in various forms, letter of intent and/or under contract. We would expect approximately $50 million of those properties to close sometime in second -- late second early third quarter.

OK. Now does your decision on whether or not to go forward on the note tender -- does your decision to acquire this hinge on your decision to go forward with the tender?

No.

So, you'll acquire that regardless.

Correct.

And what is the -- how much is under contract? Could you give that for us?

I think under contract and through due diligence period is the $60 million or $50 million to $60 million that will be closing late second, early third quarter. The balance is either under being negotiated through the letter of intent to the purchase agreement stage or some are in the letter of intent stage where there is a verbally agreed upon structure. But of course, those would have to go all the way through due diligence.

OK. And cap rates?

Cap rates are 7, 8.

7, 8 is cap rate. And -- OK. And those are split between ROE and manufacturing housing or are they off ROEs?

Not the split.

50/50?

I don't have the exact numbers in front of me but the ones that I'm referring to -- probably pretty close to 50/50.

OK.

That includes Pammy.

OK. And just a couple of other quick ones. So your total SunChamp stake that you're in, I think, was 56% to the stake left throughout the quarter?

It would have increased slightly during the quarter due to tabular contributions but not significantly.

OK. And then why did your floating rate debt pick up 5% sequentially at 30%?

Well, the floating rate debt is -- you talk about the interest expense...

I'm just -- I'm looking at as a percent of your total debt, how you guys reported on your schedule -- on your debt schedule which is -- but as your balance sheet stage, 9 of your supplemental.

OK. And which number you're looking at?

Is it 6 versus floating 30.4% is now floating versus 25.76 last quarter but your line of credit team is pretty stable and sort of...

OK. The QCard with was just plain economy.

OK.

The preferred operating partnership units that we issued in conjunction with the acquisition of the Aston portfolio moved to floating rate from fixed rate during the quarter or at the beginning of the quarter, actually, to, I think, it's the 10-year treasury to -- an incremental to the 10-year treasury. So that's why you see the 5% and that's about 35 million and that accounts for that increase.

Will there be a symmetric change in the QCard -- I mean in the amounts paid out, what was the spread?

That was -- that's our -- the spread for the quarter was 227 over the 10-year treasury and the related expenses are in the preferred OP unit distribution number in the press release.

OK. Thank you.

Thank you. Our next question is coming from Art Havener of AG Edwards. Please proceed with your question.

OK. Thanks. First, regarding the recapitalization, I believe Gary said that the total expected debt cost for the 750 million, that is, 5%, can you give us an idea of what rate you've locked in on the 625 million so far?

It's about four different trounces from 5 years to 12 years, Art, and we were stable for the most part to capture those close to the bottom of where they were during the March load. I don't have them in front of me but the blended average rate was just under 5%.

OK. So that 5% figure was for the 625, not for the total 750?

That's correct.

That's correct. We don't expect it to vary too much when we get out of the 750 because we've tended to lock the longer terms items so that the depositional lock is more likely to be in the in the five to seven year traunches. We've locked the 10s and the 12s and lot of the 7s.

OK. Are you contractually required to take this money down? I mean if you decide that's part of the consideration -- part of re-capitalization to abandon this project, is that a possibility, or not?

It wouldn't be an impossibility. Sorry, there would be no reason I would see for abandoning it.

OK. But are you required to take it down within the next 30 days? Is that what I kind of understood...

Required to take down what?

The total debt -- the new debt.

No. I mean the fact that we were to not move forward with the recap, we would unwind the edges. There would be a profit because rates have grown significantly. There is nothing requiring us to move forward. The fact that we got the rates in, we've got all the properties underwritten. We've got a significant amount of bonds tendered and options to move forward on the balance of the bonds as Jeff indicated, we'll reach decisions on today would cause the company to suggest that within the next 15 to 30 days we will have re-closed on the refinancing.

OK. So you are counting about closing within 30 days is what you expect to close?

Yes.

OK. Since, real quick on the origin, should we not expect Sun to be part of the IPO of origin? I mean you won't be investing more into origin, will you?

This is a very unlikely possibility.

OK. In regards to the 10 A portfolio...

Yeah. I will retract that statement. Investing in the IPO, that is not -- there is no Board permission to invest in the IPO.

OK. Great. In respect to the PAMI, is your relationship with the general partner to the point where you have access to the operations and management of the portfolio, and if so, have you seen the result census litigation as surfaced?

No, we do not have access to that although it will be made available to us shortly, but we have no access or control over the management or operations nor does the other party have any management or control that they're planning to acquire in both first quarter of earnings in their FFO.

What triggers them making available this information?

They're finalizing their numbers for the quarter.

OK. And then you'll be curvy (ph) to them?

Yes.

OK. I'll move on to the dividend, and in the past year on the record of saying that you always anticipated the Board to approve an April dividend increase, then you adjusted it a little bit but given your payout ratio, can you kind of sure what the Board was thinking in not raising the dividend this year?

Yeah. I think I'll make a solo correction. In the past, I've also said the Board has a policy of reviewing the dividend increase first quarter of each year, as opposed to representing that there would be a dividend increase. I think that the only difference that's taking place this year is the re-capitalization is so significant. And the company and the Board have been so focused strategically moving forward in a correct fashion. And thus interest of our shareholders is simply start any -- review of the dividend should come after the closing of the re-capitalization takes place so that we can actually be assured of what the balance sheet looks like? And that's all that's taken place.

OK. In terms of the increased capital contribution to SunChamp, can you give us an idea of how much you put into it in the first quarter, and how much you expect to put into it for the remainder of the year?

It would be fairly modest. Capital contributions which would be related to things like putting in the driveways for people moving into particular sites, So that wouldn't be construction, or I mean major like down to see if any construction at this point going out in any of the SunChamp properties there. Some of them -- there maybe some construction later in the year depending on, you know, obviously the level of leasing activity. I don't have that number at hand, but it's not a material number.

OK. Can you address the lease-up in the development projects? I've believed you mention that you had about 35 net lease sites in the development projects. Is that in line with your budget? It seems a little low for this time of the year or is there a seasonality component that will kick in later this year?

Well, a number of these are -- in fact, the bulk of these are in the north. So, you got the January, February, March crummy weather. No, it's not the sale season. So, the fact that we have net sites added in the development community is 35 in the first quarter. You know it's OK. The bread will be brought home in the second and third quarter to home sales and leasing. So, we'll just have to kind of see how the sales season goes.

OK. Thank you very much.

Thank you. Our next question is coming from Alexander Goldfarb of Lehman Brothers. Please proceed with your question.

Hi, good morning. First, just going back to the acquisition amount that you quoted, so it's about 50 million, 60 million in your contract. Tell me you're 220 sold, about 80 is the balance from that construction, sort of discussions, is that correct?

Yeah, I mean we are from discussions to OOI to contract.

OK. Is there anything that would have prevented you or for booking any results on -- I mean I understand this quarter is results aren't done, but is there anything that prevented you from booking it on your P&L for the quarter?

Simply, the basic fact that we don't know in it which is usually kind of the most critical criterion for consolidation is ownership, and I guess, you know, I mean, if you took the approach that you could consolidate everybody you are talking to, it would kind of eliminate any rationality in financial report. So, we're not inclined to do that until we have things like a closing, for instance.

So, where is legal ownership right now? Is it held (inaudible)?

It's with the partners that currently and have owned the properties for the last X years. It's with the Pammy (ph) and the majority and minority interest are partners who have always owned anchor or home this portfolio.

OK. Going to your home sales, you said it's going to pick up in the second or third quarter. What's your expectation for full year in terms of net revenue from that?

I think our earnings guidance is called for something, which, you know, in terms of certain aspects of it -- currently are still valid, for instance, home sales. We -- I think we called for a 660 new and used home sales where we've get, maybe a 100 in Q1 and Q4 and a couple of 100 in Q2 and Q3 which would get us into that 600 neighborhood. In terms of profitability, it kind of depends on the mix between the new and the used, our use do and pre-owned. Pre-owned tend to have stronger margins. So it's a little early to make a margin prediction.

OK. On the tender, if you're not successful tendering all the new -- I mean having tendered and if you need to perceive the balance, is there any impact to acquisitions to growth or it really wouldn't affect your expectations?

It wouldn't change -- they would not substantially change the use of proceeds that we envision under the secured financings whether it's the peasants or whether it's an outright kind of purchase of 100% of the bonds in the tender.

OK. And looking in your supplemental and your quarter-by-quarter breakout on page 10, it looks like some of the numbers in December's quarter were sort of, I guess, restated or updated, for example, if you compare it to the fourth quarter, the same page in the fourth quarter supplemental, SG&A is up, other income is up and the gross profit of home sales are up. What accounted for the change?

You want to look into it.

Yeah, I guess I have to look into that, get some detail on that.

OK. And then just two final questions, the SG&A -- the increase in SG&A.

Yes.

Is that sort of one time or is it the new run rate. As I think....

Well, we identified in the earnings guidance regarding G&A that....

Right. That it will be up about 900,000.

900 the consistence conversion is supposed to be pretty well done by July or August

OK.

So, that 600 kind of earns early in the year and now is incurred in the earlier part of the year. And the stocks thing looks like, you know, it's going to be 75 or 100,000 a quarter for a while.

OK.

That would hit the 300, which was in the guidance.

OK.

And about 275 with the increase in G&A is attributable to those two items.

OK. Perfect. Finally, the other income I mean, I know that you can give detail obviously it could have any details exposing origin. But, can you just walk us through what causes the volatility in the interest in other income. What are the parts in there that are very volatile?

I mean, its interest which going to be a function of the cash position of the company for instance, whether we have excess cash or not. It's going to be brokerage income is in there. And the interest on origin was in there, interest income from the origin positions in the first three quarters of 2003 and part of Q4. There were MH loans that we have bought form origin in I think July of '03 which origin purchased from us at par in - I think, it was in earlier of mid January. So I mean, the reason its volatile is, you know, because things change and that's - sorry I don't have a better answer than that but its but it kind of depends on what's going on in the business world.

OK. And then that prompted one final. Have you - the home-buying-made-easy program, you're holding those loans. Have you sold them as part origin yet or when is that supposed to occur?

We sold approximately a little over $1 million of those loans to origin at par and in Q1 we had 26 closings under the program for, a aggregate loan value of about just under $800,000.

OK. So the current balance is $800,000?

The 800 plus the loans we originated last year that weren't sold origin. So it will be closer to $2 million of loans under that program that are owned by the company are 331.

OK. So when do you expect selling this?

Bob, we're looking at that. Actually we're evaluating whether or not we want sold them at par or whether we want to hold them. So we're doing that evaluation.

OK. Thank you.

Thank you. Our next question is coming from David Shulman of Lehman Brothers. Please proceed with your question.

Yeah. Hi I don't really understand this whole cost or capital argument that if you lever up and have lower cost capital. Because if you increase with that ratio you should increase the cost of equity and since interest is not deductible because you don't pay taxes there is no additional tax you owe. So I just don't understand that if you have the cost of capital at 80% really it should be the same - as I said that ratio should really be roughly the same as the cost of capital of 50% because your cost of equities is going to go up because you are more leveraged.

Well, you know, we can have that conceptual and theoretical discussion. But the reality that we meet in the market place is that others are able to compete successfully and aggressively for acquisitions to price levels, which we can't as an investment grade company compete and these other people are non-investment grade. So, they have different standards of leverage and coverage that govern their universe versus what governs the investment grade. So, while your conceptual argument maybe completely valid, we could try to discuss that at some length. The decision in the market place is that there is a big difference and that it tends to be the unrated competitors that have been fortunate and securing a lion's share of the acquisitions over the last few years.

But the unrated competitors, in my view, have a higher cost of that free capital than you do because they have leverage?

Well, they're not issuing any either.

Well, the FICOs exactly because they're getting fundings from somebody and they have a high cost of equity.

And the competitor you are talking about also trades at, you know, much higher multiple.

All right. But there are other competitors, the private competitors as well, right?

Yeah, but those we choose to measure.

Right.

There's no market place to measure.

OK. See, I would understand your argument if you say the business is really about to really pick up dramatically, so --and sort of signaling us, your signaling to the world is that the business to be much more profitable in three years because of all the dynamics you've discussed before. So, (inaudible) will keep rolling those gains to the existing shareholders rather than putting in equity and sharing it with some other people?

We haven't said anything about going about the three year outlook, but we have spoken a bit in terms of what we see is the change of momentum in the marketplace in term of the way we seeing and performance. So, once we have looked out little site that we -- I mean they are starting too much of expectations that business will continue to improve over the next several years.

OK. But I think it's only with your public competitors, I think they're going to find that they're going to have a higher course of equity since well in four months of time?

You've point that before having the rate 50 cents of every dollar that we spend in the equity market and we increased good spread investing with only having to go into the equity market wherein essence brining that in attrition to the basic shareholder without diluting MNR and going to the equity market.

No -- no that part I agree, but I think that equity shareholders going to demand the higher return from your stocks at the cost of equities that's all, I mean I agree with I think the cost of equity is going to up. I think when all this is done when this recap is completed, I think you're going you're going to have a higher cost of equity?

Let's say time will tell.

Yes.

Thank you.

Thank you.

Thank our next question is coming from Richard Paoli of ABP Investments. Please proceed with your question.

Hi, guys. A couple of questions and then I guess the comment on with the previous exchange. The first one is that maybe more of a comment how do you compare the ability of your portfolio to this other make a public competitor I think we're on the talking about but I don't know if you over lap on portfolios of exactly the same and to compare yourself from that may not be exactly appropriate. So, my other questions are first of where as you're going to top out in terms of leverage I heard an 80% number floated around is that which you're going to use in terms of your leverage or that you perhaps where do you see fixed charge coverage settling out post re-cap?

I've got two answers for you on both measures when the use of proceed is fully applied under a couple different assumption are debt to market cap should be in the low 60s, somewhere between 60 to 64% of this year I am looking it.

Yeah, it's debt to market I mean your stock is down a fastest week because it mean anything moving around so much?

If you said the NAB is say 36 to 41 somewhere in that range.

OK

That gets you to the 60 to 64% number. OK. And then on a coverage basis EBITDA to interest probably around 2, 3 to 25 EBITDA the interest participates grew distribution between say 22 and 24.

OK. And then where you're going to settle out in terms of your proportion of variable rate debt to total debt?

Well, we think when the recap is done, of course, we this is preliminary because we haven't we still have more debt to fixed out of that 750 obviously, if you look at our balance sheet today we get about 110 million firstly prepared we might have 150 million approximately of variable rate debt today, I don't think that's going to change lot it may go down subsequent to the recap.

OK.

And then about maybe 15% of the aggregate debt on the balance sheet when everything is done.

OK. And then a number of questions I have is that was in treat about your comments with respect to the same store revenue numbers could you translate that trend in would it happen in same-store in line, because your senses you have things you can control and you know real estate taxes for example I mean it is you fight as much you can, but what is going to trend in same store NOI over the couple of years, as these say through this cycle one we've had?

I think it's I don't have like use of data in front in me I think it was pretty solid being defined at the same-store NOI is probably north of 4 to 5% for its several year prior to last year, last year we got, we got hit both ways, we got the values of repositions turning into non revenue producing and we also had some issues with expense control in this -in the company in the portfolio. Its look like the value, which is diminishing, and the expense control is back to what we hope to be or what we know to be our former performance and we hope we'll continue to be at that level. I don't think it will be 0.9% like it was in Q1, but no more say to 3 to 4% or something in that range as we go forward through the year.

So, OK. You know I get the sense that you're part of the reasonable leverage up it's not just to be competitive on acquisitions that that juice here is shelved into would do you think is the recovery and is that a fair characterization?

Yeah, it's absolutely a fair characterization and the ability to take advantage of management strength there, which is leasing, marketing and selling. And selling side, go on the acquisition side to the expense that we can buy I mean carefully some existing cash flows. You know, it was fortune enough to see the type of recovery, we expect during the next three to five years. There's a lot of value, we've created with this type of cost of that.

All right. OK. And then last question, I have is, in the call and I guess, it's for the fourth quarter results, you spoke about the rental business. For the first time, that I really heard you guys speak about it much, on the call. And then this quarter, I haven't heard anything on that and is it just a clash in a pen, what's going on with the rental business now?

That the rental business has been a small component of this portfolio from one who was the private company to public company. And they've seen soccer period, where we brought home.

OK.

Rest of them and then eventually fall down, we're doing the same thing and where we have a target range of like a 1000 to 1200 rentals that we would like to have in as the maximum in the community at any given time. We're currently looking to buy roughly of a 100 to 125 repose from outsider community now. And then transaction that we're working on moves down inside the community. These shows as we're slowly and steadily climbing success now, with selling the rentals that we have and further more, as we see a little bit of an increase in interest rates and a reduction in the available reposition throughout there. We think, we again our position will -- especially with the recap and the cost on the money we're borrowing to significantly, create some income. The other thing that I really add to that is that this business is kind of responding to both questions of rental business and why we were recapitalizing?. You know, if we are correct in seeing the bottom and an increase in occupancy slowly it begins to take faith throughout the latter quarters of this year, as we look to '05, '06, '07 and just look at returning reselling sites that they're already existing in our existing communities.

All right.

It's the - our trend - tremendous amount of incremental income obviously that falls to the bottom. So, I think, we've got one more shot as buying the repos for will put them in the rental tool. And then what I think, you will see happenings with this company and might maybe some of the other companies that have different strategy, you will see them run after more normal levels, which might be 400 to 500 in a portfolio, that's 45,000 or so

And how does the rental get reflected in the same-store numbers? You know, I saw in terms of your same-store, occupancy was flat. I mean, is that -- when you bring it and do you and rented is it considered an occupied unit?

Yeah, it's just a revenue-producing site; we don't differentiate between the two. And the only way, we would reflect it differently, as if we ever increased the program And I know, but I would clarify it's just a normal operating business.

So likely, you were talking about this big acquisition of homes bringing them in and once you got that, if you do?...

Yeah, we were talking about how big that -- 125 homes but we were actually looking at the factor, we're probably selling the 125 rental units on a quarterly basis at this point.

OK. Thank you very much.

Yeah.

Thank you. Our next question is coming from Eric Waymen (ph) of Schwerin Boyle Capital Management Please proceed with your question.

Hi, this is Dan Boyle. Gary, I wanted to ask you a question about the competitive position of manufacturing housing communities versus apartments and site built homes. My perception in the past was that there was a pretty good advantage on your side but now, with the rental increases are marching forward and financing being expensive. I'm just wondering, if the advantage has eroded and that the pricing power that you had is, it perhaps run its course. So, could talk about that a little bit and help me understand where we are at this point in terms of the competitive situations?

I think that in our review, right now today, , we still can be very, very favorable fully to the multi-family. What we have seen -- over the last four or five years and certainly since 1999 of the combination of two things, one is the stock credit environment of lenders who provided credits to people, its to being in the home and those turned into repose so into decline in the occupancy, but secondly, in it, at historically, low interest rate, levels for single family residential site programs. We did have lot of compete -- a competition for the last four or five years, at that level, on particular. You know, with the first time homebuyers, who were able to walk into a home with nothing down and -- very, very sub -- four sub-five percent financing. So, that has been competitive to us but through that all, when you compare what you can get for 1500 square feet and a manufactured home. Even under today's rent and interest rate to fail up a little bit multi-family has been particular and we still have got pretty significant advantage there into the extent that interest rates due to fail up a little bit. I think you restore the competitive advantage that manufactured housing has.

OK. Gary, is your plan to - is your plan to continue to tried a push price as you have in the past, I wonder if that's not realistic?

Yeah, I think, we've been averaging you know, 4% to 5% renewing for the last 10 plus years. I think one differentiation between asset classes, between MXC Intersil, we've been more focused on -- the age respected communities is it gives us them of volatility during difficult periods like we're in right now. But it gives us the benefit of being able to get larger rental increases to the residence and tied to CPI indexes or other indexes back from fixed income that the resident fab. I think I could trade off but I feel very comfortable that we're were at in the rental and below we will continue to be able to get kind of rental increases we've gotten in the past, and then particular one thing that we always pay attention to, I think something that came to really hot chateau (ph) is the concept of reinvesting back into your properties. This is a company US taken a lot of hope, early of use Sun has in the early mid late 90s, as we continue to have, capital reinvestment in our proprieties of over the level of a $150 to $200 million of site and the revenue will basically tell you that as long as you're putting something back into the community, i.e., giving me something to my rental increase it's fine. The moment you just keep bumping the wrist 4 or 5% and don't do anything to take care of maintaining the communities, it's not fine. So, that passed as the work while for us historically and expected the work while for us in the future and I think that we'll begin to see two possible factors taking place, one, the burnt of the refill (ph) it means there will be net -- new more net increases to occupancy and slight increases to interest rate will mean against some of the cheaper cyclo housing we'll be able to be more competitive.

As you evaluate this situation when you're underwriting for your acquisitions, do you net out when you say a 7% or 8% cap rate, are you netting out something for putting back CAPEX? Number one. And is it 7% to 8% on the basis of the cash flows that are in place now was helpfully subnormal occupancy numbers?

Yes to both questions, and we're very specific the way we calculate our cap rate is unhistorical.

OK.

NOI adjusted for we see a certain amount of rebuild or whatever we want to adjust for. And then only change if the Reno (ph) increase has actually been put in place. And that will be annualized in there. So I they are about as accurate over the cap rate is good we calculated there are no future projections if you will for the coming year that we look at in our cap rates. And all CAPEX is accounted for in those cap rates.

And one final question. Where were cap rates when interest rates were higher several years ago?

Now, interestingly enough, I don't think cap rates have changed that dramatically, I think that there is may be in my opinion a 50 basis point differential between how low interest rates have gone. But you know, you got communities that trade at 8 and 9 cap rates that now probably trade 50 basis points lower but you've got a lot of the quality communities that -- they could trade at sub 7% cap rates and I think that is very, very realistic. I don't think that will change more than 50 basis points one way or the other, with even a substantial change in interest rate. A lot has to do with the replacement value and lot has to do with competitive forms of housing that although interest rates, you know, are unusually low right now in cyclo housing. I think we all would agree that they are not going to stay that way forever.

So I think this is a cap rate that consistently will move through for some time in the future. As I think this also realization the periods just greater in intrinsic value. In this aspect class and another aspect classes -- it will be realized in real estate in the years to come.

Thank you very much and good luck.

Thanks.

Thank you. Our next question is coming from Ralph Black (ph) of AIO Financial. Please proceed with your question.

Hi, guys. You talked a little bit about cap rates. Could you also comment may be on any changing environment in the market for acquisitions over the past six months or are more properties becoming available or is the mix of available properties different?

You have had difficulty I think buying a lot of assets in the past I guess because they 're such good markets but is there any change there?

So I think of the only two changes with the cost of that being cheaper there is a lot more competition from some of the small private competitors - who are levering debt and syndicating the equity piece is unable to get much lower return on the equity side. So that's the reason cap rates have been driven down the 50 basis points that I referred to. But interestingly enough as the same time that all this is going on I think what I discussed in previous calls and what is working to our benefit today and we don't see a shortage of acquisitions is the fact that for all of the mom and pop (ph) operators and the syndicators, who we have managed an operated manufacture housing communities for the last 10 to 20 years. For the first time from '99 to '04 they've met challenges, they have never had to deal with before. And therefore, we are seeing opportunity from those people who I've said may be retired to warm weather, may be getting one with their life, may be for the first time looking at a seven cap rate -- this is a great deal, I don't want to work this hard anymore, I want to play golf, I want to whatever, I'm not felling good. Those opportunities are really becoming present and available to us right now. And by way of example, three of the communities that we have under contract, its from one of the larger private owner operators who's been in the business for more than twenty to twenty five years is very, very little down on its portfolio. And is finally looking at an age where he sat down and said I'm looking in to first try a little bit, I don't want to work this hard and go back up the management group to refill and release the vacancies that he has over the last four five years. So, those opportunities are therefore us and we're very encouraged by what we're seeing in the acquisition area. And the quality, age-restricted communities' institutional grade that traded at the six-cap rate or asked for the six-cap rate 10 years ago are still commanding the six cap rates today. Nothing's changed at that level.

OK and just one follow on question there. Is the availability of being able to issue open units of competitive advantage there, do some of these people might not want to take a tax hit?

That's a very competitive advantage to the sellers, not a very competitive advantage to us when our stock is trading at the levels that its trading at and I think that if management strategy works to the full benefit of shareholders and I have a full degree of confidence as our board does that we will see appreciation in the stock price as quarter-by-quarter we're able to increase FFO line of per share basis and get the kind of multiple that we deserve in the future, recognizing that valuation is subject to your performance. And as based on our performance, this is where we should be valued right now; and the management and the company is determinant to perform better and receive a better multiple and better price in the future. And then we can use those operating partnership units.

Great. Fair enough. Thanks.

Thank you. Our next question is coming from Jay Leupp of RBC Capital Markets.

Thanks. I'm here with Brett Johnson (ph). Just a couple of follow-up questions. On the subject of RV Parks, you and your editors are talking more and acquiring more of these types of properties. Could you give us just a brief comparing contrast versus your traditional manufacturing of community in terms of risk profile, the seasonality, the cap rates, and is this more or less of a risky asset acquisition prospect than your traditional business?

Well, I am afraid, I don't know. I'll let Jeff look into a little bit of our historical numbers and present them to you. I think that the bottom line is there was a viewed difference in risk profiles due to the seasonal nature of the travelers into the RV Communities; and, as Sun has owned them over the last 5 to 7 years, we have learned that there is not as great volatility as we once thought -- that more and more there is a demand for current models and what we call year-round rentals that might just have been on there 3, 4 or 5 months but they leave their home and paid rent based on some structured basis. So there is more consistency to the income stream that we though historically. And then, in general review, what we found is that the RV community lifestyle is a much more active lifestyle. It is a younger group than the main manufactured housing dweller, and more activities have to be provided, and they spend a lot less time in their home and a lot more time running around chasing activities that are available to them. And I'll let Jeff address where we have been a little bit with their numbers historically.

Well, what we find is that the seasonal RV revenue has, I think, increased every year that we've owned RV communities; and the couple of elements in the revenue stream that need to be understood or should be understood -- a) is that these people have, in general, higher disposable income than our either our manufactured home residents or our retirees in Florida, because they are tolling around a rig that's, you know, $100,000 to $200,000. So they are more affluent. And, secondly, it's a revenue stream to the company that is independent of any of the issues that have played in the industry over the last four or five years in terms of repossessions and credit issues and so forth, because this is the cash business on the seasonal side; and they're -- we're not -- it's not subject to financing the homes and so forth.

And would you say that that your move is more into this asset class or different to this asset class? Is it more financially driven or strategically driven? And then just one other follow-up on your recap you've discussed up. What would be prospects in this recap for share repurchases down the road; and what sort of parameters would you look at to actually make that decision, even though you're going to have a lot higher leverage to actually buy your shares as opposed to buying either RV products or more manufactured communities?

Well, I think, you hit on all the right points. I think, first of all, the board has consistently authorized program whereby the company can buy back up to 1 million of its share. I think that as we were to buy back those shares, the leverage obviously would go up. And I think that management intends to carefully evaluate spending a dollar on a share buyback versus spending a dollar on an acquisition or acquiring and repurchasing company's preferred. And I think that that's all part of the strategy, moving forward; and a lot of that will also have to do with our share pricing.

In terms of buying into the -- into this asset class or into the RV communities, I think, it really began from an operations standpoint that our operating people became very, very comfortable with the management and the characteristics of, I think, the stress-specific challenges of managing RV communities; and they are now prepared to expand at that capability and expand that portion of the portfolio. So that's really what's driving as opposed to what the pricing may be or I guess the financial considerations.

Thank you.

Yeah. I think that before the audience is still on that the RV portfolios growth by ourselves and our competitors over the last five or seven years, we have performed very, very well for both companies; and they have -- while they are subject to other things, they haven't been subject to the whole repo situation. And the opportunity to acquire those probably is similar for both companies to enhance shareholder value and create accretion; and I think that we both recognized as separate competitors that there is a lot of room in those cap rate for us to have gotten more comfortable with the asset class, and that's what driven those cap rates down over the last four, five or six years.

Thank you. Our next question is coming of John Howard of Greenstreet Advisors. Please proceed with your question.

I just had a couple of quick questions on your same property results that you commented on earlier. On the 3.9% increase in the revenue side, is there something unusual going on in that line item? I can explain a part of it through your change in occupancy and your increase in the average rent. But is there something else going on in that line item that happened this quarter?

The other element that's in that line item is the RV communities and the seasonal RV business that had a strong first quarter. That's probably the missing piece that you're looking for.

OK. So that must have been extremely strong into this quarter. Is that right?

It was very good.

OK. And a follow-up on the -- which is a question about the rental homes. How many rental homes did you have in your same property results in the first quarter of '04 versus '03? Is that -- was there a much of a difference between the rental homes in those two periods?

I'm going to say -- all right, we don't have those numbers. It could vary 100 homes.

But you have the ramped up months in that one-year period. Is that right or have you?

You mean, in the one-year period?

Yeah. From '03 to '04 -- first quarter '03 to first quarter '04.

I'm going to say it could have ramped up 300 or 400 homes during that period of time.

OK. That's all I have. Thanks.

The goal has been to try and reach a level of 1000 homes or so and then begin to buy them at the same rate that we're selling them on a quarterly basis. That's what we're looking to do; and then as we see a turnaround, OK, and repos start to disappear, that number will go back down to a more normal level, as I said, which I expect will be 400 or so ramp-up units out of base of 40,000 to 45,000 sites.

Thank you. Our next question is a follow-up coming from Jordan Sadler of Smith Barney. Please proceed with your question.

Hi, guys. I just had a quick one on the rental homes you've purchased. Well, I guess, the new homes you're looking for this program, it's going to be about 125 that you're negotiating on. What's the price per home?

The price per home has ranged $10 to $15 a square foot in these particular homes, because it will be coming from a source outside of our communities, where kind of that market has with the lender. And one way to resolve it that we are talking about right now is that we've given their price to take down and move their home and then set it up. So I don't expect a range. I mean we're talking at about $12 a square foot in our minds.

And is that for -- what sizes are these homes on average?

On average...

(inaudible).

... they range from zero to four years in age and 1,000 of 1,500 square feet in size.

What are you selling them at right now? You said you're selling them at a pace of...

$5,000 over and all on cost.

5,000 overall. And is that gross profit or does that go to the in the accommodation?

That's profit on which a commission of approximately anywhere from $500 to $1,200 might be commission.

OK. So the net profit is probably something like 4,000 a home.

Correct.

Thank you.

Thank you. At this time, we're showing no further questions in queue. I would like to turn the floor back over to management for any additional or closing comments

Yes. And I would like to thank everybody for their participation today. And we look forward to sharing with the marketplace our second-quarter results and information related to the various topics that the management and company is working through right now. Thank you.

Ladies and gentleman, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.